Question 1

How Does Bankruptcy Work?

Accepted Answer

No one is immune from debt or life’s challenges, and sometimes people need help getting back on their feet. Federal law established the bankruptcy system for that very reason. It helps by unwinding the contract between you and your creditor. Without a contract, you have no obligation to pay the debt—you get a fresh financial start.

As powerful as bankruptcy is, it won't solve every financial problem, so it’s crucial to learn what bankruptcy can and cannot do

Question 2

Can I Keep My Property in Bankruptcy

Accepted Answer

Everyone needs things to maintain a home and employment. You’d hardly get a fresh start if you lost all of your belongings. So don’t worry about losing everything you own in bankruptcy.

Each state decides the type of property a filer will need after bankruptcy, so exemptions vary widely. Even so, you’ll likely be able to protect some equity in a home and car, household furnishings, a retirement account, and more.

But you might also learn that some of your assets aren’t covered, especially if you own luxury property like artwork, collections, boats, stocks and bonds, and rental property. If you have nonexempt property, check for a “wildcard” exemption you can use to protect the nonexempt property of your choice.

It doesn’t matter whether you file for Chapter 7 or Chapter 13—the exemptions are the same regardless of the chapter filed. The chapter will determine what will happen to your nonexempt property, however.

In Chapter 7, you’ll lose nonexempt property—it will be sold for the benefit of your creditors.
In Chapter 13, you’ll keep all of your property—but you’ll pay its value to your creditors through the Chapter 13 repayment plan.

The system ensures that creditors will receive the same amount in both chapters.

Examples of How Property is Treated in Bankruptcy

Quinn’s Case: Quinn lives in Illinois. She owns a bicycle worth $500 and studio apartment furnishings worth $2,000, all of which she reclaimed or sourced from second-hand shops. In Illinois, she can use a wildcard exemption to protect personal property valued up to $4,000. If she files for bankruptcy, all of her property will be protected.

Aurora’s Case: Aurora lives in West Virginia. She owns a car worth $5,000 and has $120,000 in home equity. In West Virginia, she can only exempt $25,000 of home equity using the homestead exemption and $2,400 of vehicle equity using the motor vehicle deduction. Because her property isn’t fully exempt, if she files for Chapter 7, her property will be sold. From the sales proceeds, she’ll receive the $27,400 exemption amount and her creditors will receive what remains after fees and costs. If she files for Chapter 13, she’ll keep her property, but she’ll pay her creditors $97,600—the amount of her nonexempt property—or $1,627 per month for five years.

Declan’s Case: Declan lives in Nevada. He also owns a car worth $5,000 and has $120,000 in home equity. In Nevada, he can exempt $605,000 of home equity using the homestead exemption and $15,000 of vehicle equity using the motor vehicle deduction. Because his property is fully exempt, he won’t lose anything in Chapter 7, and he won’t pay to keep property in Chapter 13.

If you want to take a peek at what you’d be able to protect, check out bankruptcy exemption laws by state

Question 3

Can I Discharge My Debt in Bankruptcy?

Accepted Answer

You already know that filing for bankruptcy works by wiping out debt, such as credit card balances. And you'll be able to erase overdue utility payments, medical bills, and personal loans. You can even get rid of a mortgage or car payment if you're willing to give up the house or car you put up as the collateral securing the debt.

But did you know you can't discharge all debts? For instance, child support will never go away in bankruptcy, and student loans are difficult to wipe out (you'd have to win a separate lawsuit). These types of debts are known as nondischargeable debts. Before deciding to file, be sure that bankruptcy will discharge (get rid of) enough bills to make it worth your while.

Examples of How Debt is Treated in Bankruptcy

Quinn’s Case: Quinn financed her studies at graphic design school but couldn’t find a job after graduation. She owes $45,000 in student loans, $20,000 in credit card debt, and $3,000 in suspended license fees. The $2,000 credit balances are dischargeable in bankruptcy, but the suspended license fees and student loans are not. However, if Quinn files a bankruptcy trial called an “adversary proceeding” and proves that it’s not feasible for her to pay off her student loans, she could receive a discharge (this isn’t cheap or easy to do).

Aurora’s Case: Aurora’s finances got out of hand during college after opening numerous charge accounts. She owes $50,000 in credit card debt, $1,500 for a medical bill, and $2,000 for a gym membership. Because all of Aurora’s debt is dischargeable, she’ll be able to wipe it out fully in Chapter 7.

Without knowing how much she earns, we can’t predict her monthly Chapter 13 payment. However, if we consider her nonexempt property from the previous example, we know she’d pay $892 per month for five years for a total of $53,500, or 100% of her debt—a substantial reduction from $1,627. The amount dropped because she doesn’t have to pay more than she owes.

Declan’s Case: Declan’s finances became unmanageable after a divorce. He owes $20,000 in child support arrearages and $2,000 in credit card debt. If Declan files for Chapter 7, he’ll be able to discharge the $2,000 credit card balance—but that’s it. Child support arrearages are nondischargeable, so he’d remain responsible for it after bankruptcy. In Chapter 13, filers must pay all child support arrearages through the plan. So Declan would pay a minimum of $334 per month for five years—possibly more if he had additional discretionary income to use toward the credit card debt. Again, we aren’t sure about his payment amount because we don’t know how much he earns

Question 4

Which Bankruptcy Chapter Should I Choose?

Accepted Answer

Not all bankruptcy chapters work the same way, which is good because when your financial situation is unique (as all are), having options helps. Your next step will be determining whether a liquidation or reorganization bankruptcy will be best for you.

Chapter 7 Bankruptcy: The Liquidation Bankruptcy

Chapter 7 bankruptcy is most filers’ first choice. It wipes out qualifying debt without creditor repayment. It's also quick, taking about four months to complete. And if you're an individual, you don't lose everything—you can keep the property you need to work and live.

But it comes with downsides. Because it's quick and doesn't involve creditor repayment, Chapter 7 won't help you stop a foreclosure or repossession permanently. Also, it's called “liquidation bankruptcy” because the Chapter 7 trustee appointed to handle the case sells the debtor’s property for the benefit of creditors. In an individual bankruptcy, the trustee sells the filer's nonexempt luxury property, so it's common to lose things like sporting equipment, gun collections, boats, recreational vehicles, and rental property. In a bankruptcy brought by a business, the trustee sells all of the business assets.

Examples of Who is Right, or Wrong, For Chapter 7 Bankruptcy

Quinn’s Case: Quinn is considering Chapter 7. Eliminating her $20,000 credit card debt would allow her to pay more toward her nondischargeable student loans and outstanding licensing fees.

Aurora’s Case: Aurora isn’t considering Chapter 7. Although she likes the idea of discharging her $53,500 in debt in a matter of months, she’d lose her home in the process. It would be more economical to negotiate down her debts outside of bankruptcy and find another way to pay.

Declan’s Case: Declan isn’t considering Chapter 7. Discharging $2,000 in debt isn’t enough to offset the damage to his credit. It also makes more sense to save his Chapter 7 discharge—just in case.

Reorganization Bankruptcy Chapters 9, 11, 12, and 13

Individuals and businesses who have extra income to pay debts—but not enough to cover current expenses—use "reorganization" bankruptcy chapters. The debtor, creditors, and the court agree on a plan that redistributes the debtor’s income among the creditors. Here’s who typically uses each of these types of bankruptcy:

individuals and sole proprietors use Chapter 13 bankruptcy.
large businesses tend to use Chapter 11 bankruptcy while small businesses benefit from Subchapter V
Chapter 12 is a unique chapter for small farmers and fishermen, and
cities, school districts, and municipalities use Chapter 9.

Chapter 13 Bankruptcy

This chapter requires a filer to pay creditors through a three- to five-year repayment plan. While the repayment requirement is often too costly for many, it has benefits. For instance, if a creditor is playing hardball, a filer can avoid collection efforts and force the creditor into a Chapter 13 payment plan. However, one of the biggest benefits of Chapter 13 is that a debtor can avoid foreclosure and keep a house that would be lost otherwise.

Because debts aren’t treated equally in Chapter 13, a debtor can often channel the monthly payment toward the things the debtor wants to accomplish, such as catching up on a house or car payment and paying off nondischargeable tax balances and support obligations over time. Creditors holding debts that filers don’t care much about—credit card, medical, personal loan balances, and the like—are left dividing what remains, which usually isn’t much.

Other benefits exist, too. For instance, if a home is significantly underwater, a filer can strip off a junior residential mortgage. It's also possible to reduce the amount owed on personal property or nonresidential real estate if the debtor can pay the reduced amount in full through the plan (known as a “cramdown”).

Overall, drafting a Chapter 13 plan is an involved process, and retaining a bankruptcy lawyer is highly recommended. Other reorganization plans are even more complex. But because they involve extensive negotiations, even more options are available.

Examples of Who is Right, or Wrong, For Chapter 13 Bankruptcy

Quinn’s case: Quinn would consider Chapter 13 if she didn’t qualify for Chapter 7 because, depending on her income, she’d probably pay less toward the credit card and student loan debt while paying off the nondischargeable licensing fees.

Aurora’s case: Aurora isn’t considering Chapter 13. It doesn’t make financial sense. Not only would she have to pay 100% of the debt she owes, but she’d have to pay up to 10% in trustee fees, as well.

Declan’s case: Chapter 13 might be a good option for Declan. His ex-wife is threatening to use a wage garnishment to collect the child support he owes. Not only would it be embarrassing, but it would take a more significant chunk out of his pay than the $334 plan payment. Plus, because all of his property is exempt, his monthly payment will remain low.

Question 5

Bankruptcy Eligibility

Accepted Answer

You don't need a particular amount of debt to file for bankruptcy, but there are lots of other eligibility rules—these are the most common.

Multiple Bankruptcy Filings

Debt discharges aren’t unlimited. If you've filed for bankruptcy before, you might not qualify immediately. The waiting period will depend on the chapter you filed previously and the chapter you intend to file now. For instance, suppose you filed for Chapter 7 two years ago. The waiting period between a Chapter 7 and 13 filing is four years. It’s eight years if you want to file another Chapter 7. So you’ll need to wait for another two to six years.

Qualifying for Chapter 7 Bankruptcy

Almost everyone must pass the "means test." There are three ways to meet this requirement.

First, the easy way. Check whether you’re exempt. If you are, you can skip the means test altogether. Filers who have more business debt than personal debt are exempt. So are certain military members and veterans.

Next, the reasonably straightforward method. You’ll compare your gross household income to your state's median income for a family of the same size. Add the gross income earned by you and your family members over the last six months and multiply by two. Then compare it to the figures posted on the U.S. Trustee website (select "Means Testing Information"). If your income is less than or the same as the state's median income for your family size, you'll pass.

Finally, the complicated approach. If your gross income is too high, you can take the second portion of the means test. You’ll use the means test forms to deduct allowed expense (beware—this sounds easier than it is). You'll be eligible for Chapter 7 if you don't have enough income to pay into a Chapter 13 plan.

Examples of Who Qualifies for Chapter 7 Bankruptcy

Quinn’s Case: In Illinois, the gross income for a single person is $58,698 (as of April 2021)—well above her $45,000 per year salary. She passes the means test and will qualify for Chapter 7.

Aurora’s Case: The gross income for a single person in West Virginia is $50,855 (as of April 2021) and Aurora’s $125,000 gross income well exceeds it. However, Aurora’s debt resulted from a failed cupcake delivery startup from her college days. Because her debt is primarily business debt, she’s exempt from taking the means test and will qualify for Chapter 7.

Declan’s Case: Declan shares custody of three children with his ex-wife. In Nevada, a family of three can gross $77,536 (as of April 2021). Because Declan earns $85,000 per year, he didn’t pass the first portion of the means test. However, because he could deduct his ongoing child support payment from his income on the second portion of the means test, he qualifies for Chapter 7.

Qualifying for Chapter 13 Bankruptcy

Far fewer people file for Chapter 13 than Chapter 7 primarily because the benefits offered by Chapter 13 come at a hefty price—and many can't afford it. The first set of requirements are relatively easy to meet:

Chapter 13 is available to individuals and sole proprietors only—businesses can't file.
If you exceed the Chapter 13 debt limits, you'll have to file an individual Chapter 11 case.

The tricky part is the required payment. While it’s possible to “pay pennies on the dollar,” for most, Chapter 13 gets expensive fast because, in addition to your monthly living expenses, you must make enough to cover the larger of the following over five years:

all of the debts you’re required to pay in full, such as current tax debt, support arrearages, and house or car payment arrearages
the value of any nonexempt property, or
your disposable income—the amount left over after subtracting allowed expenses.

People who qualify for Chapter 7 but elect to file for Chapter 13 don’t need to follow these rules. They pay according to their budget over three years—but they can extend the period to five years if it’s more manageable. Find out more about calculating a Chapter 13 bankruptcy payment.

Qualifying for Chapter 11 Bankruptcy

Much like Chapter 13, filers must propose an acceptable plan. But the process is significantly different and even more complicated. Find out more about individual and business Chapter 11 bankruptcies.

Question 6

Hiring a Bankruptcy Lawyer

Accepted Answer

Retaining a professional to help you with your case is well worth the cost. Not only will you have peace of mind that you’ve filed a correctly prepared case, but you’ll also receive guidance throughout the entire process. Most importantly, a bankruptcy lawyer will ensure that you don’t lose important property unexpectedly and that you don’t find yourself facing bankruptcy fraud charges.

Attorneys’ fees for a Chapter 7 case can range anywhere from $1,000 for a simple matter to $3,500 or more for a more complicated case depending on where you live. Most filers can expect to pay somewhere between $1,500 and $2,000. Keep in mind that a Chapter 7 bankruptcy lawyer will require you to pay the fees in full before filing your matter. Why? Because the bankruptcy case would wipe out any unpaid amount.

By contrast, Chapter 13 lawyers fees will be significantly more, but unlike Chapter 7, many will accept a downpayment as low as $100. You’ll likely be able to pay the remainder through the repayment plan. Learn about your options if you can’t afford a bankruptcy lawyer

Question 7

The Bankruptcy Process

Accepted Answer

While most people hire a bankruptcy lawyer to prepare their bankruptcy paperwork and guide them through the process, it's possible to do your bankruptcy yourself if it's simple enough. You can get a feel for your case's complexity using our bankruptcy quiz—we'll alert you to issues you might want to run by a bankruptcy lawyer.

Starting Your Bankruptcy Case

Your bankruptcy case will begin when you file the bankruptcy paperwork with the bankruptcy court. Go to your state's bankruptcy article for specifics on where and how to file.

The court will issue an automatic stay that will prevent most of your creditors from continuing to collect from you. Even court cases and trials related to debt collection will have to stop. Keep in mind that bankruptcy won't stop all lawsuits—for instance, you'll still have to make support payments, and criminal actions can go forward, too.

The Bankruptcy Trustee

Don't assume that what you say in your paperwork will be accepted at face value. The court will assign a professional called the bankruptcy trustee to check out your filing thoroughly.

When reviewing your paperwork, the trustee will compare the figures in the petition and schedules to your tax returns, bank statements, paycheck stubs, profit and loss statements, and the other financial documents you’ll be required to provide. The trustee will also look for signs of bankruptcy fraud.

If the trustee spots an issue, the trustee might do any number of things. For instance, it isn’t unusual for a trustee to ask for additional documents or photos or inspect an item of property, storage space, or real estate. A trustee will usually attempt to work out a problem informally before or at the 341 meeting of creditors. If you can’t resolve it, the trustee will file a motion or adversary proceeding (although these actions are relatively unusual).

The Creditors' Meeting

Every filer must attend at least one bankruptcy hearing—the 341 meeting of creditors. It isn't a court appearance, but you'll still need to take it seriously. The trustee—not the judge—holds the meeting in a conference room at the courthouse or elsewhere, and about ten filers are assigned to appear during the same hour.

When it starts, the trustee will take attendance and provide initial instructions. Here's what you’ll do next:

A trustee who is satisfied with your responses will conclude the meeting. Otherwise, the trustee will continue the case until another day—something that often happens when one of the following applies:

you forgot your identification
the trustee needs additional documents from you, or
a creditor needs more time for questioning.

In most cases, the debtor’s appearance at the creditors' meeting takes less than ten minutes.

Final Steps to Discharge

At this point, Chapter 7 filers will be in the final stretch with one more responsibility to complete—filing a financial management course certificate. By contrast, Chapter 13 filers will just be getting started. They’ll need to do:

ask the judge to confirm (approve) the proposed repayment plan at a confirmation hearing
complete the repayment plan, and
file a financial management course certificate and other documents with the court.

After completing each step, the debtor will receive a debt discharge wiping out qualifying debt

Question 8

Life After Bankruptcy: A New Beginning

Accepted Answer

To make the most of your discharge and ensure sure life after bankruptcy goes smoothly, you’ll want to do a bit of planning.

Temporary Problems With Housing, Financing, and Banking

Some areas of your life will be more challenging to negotiate for a year or two after filing for bankruptcy, specifically, renting or leasing housing, financing a car, and establishing a bank account. So it’s essential to have these things in place before filing. And don’t plan on making changes soon.

Tip. If you’ll be letting go of a house and you're worried about moving your children's schools, rent something in the area, if possible—before filing, of course.

Rebuilding credit

You can start rebuilding credit soon after completing a bankruptcy. Most filers are surprised by how quickly they receive credit offers. But it makes sense. Creditors know you won’t be able to file again for quite a few years, so if you’re employed, you’ll be a reasonable credit risk. Take the opportunity to find out about credit-building strategies.

Buying a house

Many filers are relieved to learn that they don’t need to push aside a dream of buying a home. You could be eligible as soon as two to four years after your bankruptcy case. Find out more about post-bankruptcy homebuying requirements so you can plan accordingly.

Planning for the Future

After filing for bankruptcy, it’s common to want to secure your future. The first step is following a sound financial plan, of course. But you’ll also want to safeguard yourself against unexpected financial hardships. Putting money aside in a savings account is always a good idea. But you might want to contribute to a 401k plan or another ERISA-qualified retirement account. Not only would it be exempt if you needed to file for bankruptcy again (it happens), but you could draw on it in an emergency. Obtaining life insurance and making a will are other ways to provide for your family, too.

Filing for Bankruptcy in 2024

Find the answers to common bankruptcy questions while learning about the three types of bankruptcy available when filing for bankruptcy in 2024.

Can I Keep My Property If I File for Bankruptcy?

Exemptions Protect Property When Filing for Bankruptcy

How Exemptions Work in Different Types of Bankruptcy

Can I Keep My Car When Filing for Bankruptcy?

How Do I File Bankruptcy for Credit Card Debt and Other Bills?

When Filing for Bankruptcy, Which Type Should I Choose?

Filing for Bankruptcy: Chapter 7, The Liquidation Bankruptcy

What to Know About Filing for Chapter 7

How Filing for Chapter 7 Bankruptcy Works

Filing Reorganization Bankruptcy Chapters 9, 11, 12, and 13

Filing for Bankruptcy Chapter 13

Bankruptcy Eligibility

Multiple Bankruptcy Filings

Qualifying for Chapter 7 Bankruptcy Filing

Qualifying for Chapter 13 Bankruptcy Filing

Qualifying for a Chapter 11 Bankruptcy Filing

How Much Does It Cost to File Bankruptcy?

Filing for Bankruptcy Without an Attorney

Filing for Bankruptcy: The Bankruptcy Process

Starting Your Bankruptcy Case

The Bankruptcy Trustee

The Creditors' Meeting

Final Steps to a Bankruptcy Discharge

Life After Bankruptcy: A New Beginning

Temporary Problems With Housing, Financing, and Banking

Rebuilding credit

Buying a house

Planning for the Future

Alternatives to Bankruptcy

Need More Bankruptcy Help?

How It Works